In-Game Coins

Utility tokens are a fairly new and innovative asset class. In difference to stocks, where the value highly depends on the performance of the company invested in, the utility token gains value depending on its usage. Whether it is just used as the fuel of a platform or has several use cases across different platforms and products, the price should highly correlate with its number of users. However, in the past we have mostly seen the downside of the utility token in the cryptocurrency market, with major price declines due to no usage and no adoption. With not many successful utility tokens in the market, it is difficult to estimate the potential market cap of utility tokens with adoption. However, outside of the cryptocurrency market, the gaming industry has successfully integrated virtual currencies into their products in recent years, giving us a glimpse of how successful utility tokens could be. In this article, I will take a look at two successful in-game currencies to see, how their financial data ranks among other cryptocurrencies.

Virtual currencies in games are a relatively new mechanism and have been introduced as part of the “Freemium” model. Freemium is a business model where users can play the basic features of a game for free but advanced features or the purchase of in-game items requires payments. After some Freemium titles revealed the potential revenue generated with virtual currencies, major video game publishers also started to integrate virtual currencies into their products. While in some games purchasable items can just be used to change the appearance of an avatar, in-game currencies have seen tremendous interest in games, where the purchasable items can give a gamer a competitive edge over other gamers. This is especially the case in sports games, where gamers can buy better players for their team with the help of virtual currencies.

One of these sports games with a purchasable in-game currency is the NBA 2K series. Video game publisher Take-Two has introduced virtual currencies in NBA 2K13 and they have seen tremendous interest ever since. While Take-Two already called the sales of virtual currencies in NBA 2K13 “high-margin revenue”, sales of virtual currencies in the NBA 2K series grew by an incredible rate of 150% in both 2014 and 2015 and by about 70% in both 2016 and 2017. Growth in 2018 has slowed down a bit but is still at a high-flying 34%.

Unfortunately, Take-Two doesn’t disclose the total revenue generated with virtual currency sales in NBA 2K publicly, however, they have named the increases in revenue generated by the NBA 2K series in fiscal year 2017 (265.8 million USD) and 2018 (159.4 million USD). Valuing these numbers against the increases in copies sold and the percentage increase of revenue with virtual currencies enables us to estimate the increase in revenue with virtual currencies in NBA 2K for the fiscal years 2013 to 2018, which can be seen in the following graphic. Don’t take these numbers as an exact value (it is just an estimation) but they should be good enough to give us a hint of how much revenue Take-Two is generating with virtual currency sales in the NBA 2K series.^1-11

Aside from the NBA 2K series, the sports gaming sector is dominated by EA with yearly releases in the FIFA series, Madden NFL series, NHL series and NBA Live series. All of these games have an integrated “Ultimate Team” mode, where gamers can collect players and build a team to compete against each other online. Players can be obtained with coins or points, whereby coins can be gained with in-game success and points can be bought with fiat money. Points enable gamers to buy item packs with different players included in them, which might be better than the players already included in the gamers’ team but might also be a lot worse.

These in-game buys with fiat money are an extremely successful revenue source for Electronic Arts and accounted for 21 percent of EA’s net revenue in fiscal year 2018, which roughly equals 1.1 billion USD. In-game purchases in Ultimate Team are growing at a tremendous rate – in fiscal year 2017 its net revenue was at around 775 million, while it was at around 660 million in fiscal year 2016. Unfortunately, EA doesn’t disclose percentages or totals of their Ultimate Team revenue per game, so we just have to regard it as a total per all Ultimate Team modes.^12-15

So, how would these in-game currencies rank among other cryptocurrencies regarding financial data? They are different from most cryptocurrencies, since those mainly have a fixed supply and an increase in demand results in an increase in price. However, an increase in demand for these in-game currencies just leads to an increase in tokens sold, NBA 2K’s VC or EA’s Ultimate Team points don’t have a max supply and therefore stay at the same fixed price (unless they issue a discount). It makes them easier to compare to ICOs than to the market cap of cryptocurrencies, because with ICOs we usually look at amount of money raised (which is the actual amount of money put into this ICO) while the market cap just multiplies the current price of a cryptocurrency with its circulating supply (e.g. 10 million invested in a coin might result in a 100 million increase in market cap).

Positioning these two in-game currencies in a ranking of money raised by ICOs shows their huge success. EA’s net revenue with the sale of virtual currencies in their Ultimate Team mode from fiscal year 2015 to 2018 is at around 3.1 billion USD and might even surpass 4 billion once fiscal year 2019 is completed on March 31, 2019. The estimated net revenue generated by Take-Two with the sale of virtual currencies in the NBA 2K series from fiscal year 2013 – 2018 is at around 1.2 billion USD. There are only two ICOs that raised comparable numbers with the EOS ICO (4 billion USD raised) and the Telegram ICO (1.7 billion USD raised). Adding to that, these ICOs are huge outliers concerning amount of money raised, no other ICO has raised even close to a billion U.S. Dollars and only a small number out of thousands of ICOs has raised over 100 million USD.¹⁶

This net revenue generated in both sports game series by sales of their respective virtual currencies could be viewed as their market cap in the current form the tokens are sold. Every sold token moves from the infinite total supply to the circulating supply with every token having a fixed price. Ranking these market caps in CoinMarketCap’s top 100 ranking places both in-game currencies among the top cryptocurrencies. With a market cap of 3.1 billion USD, EA’s Ultimate Team is ranked below EOS and above Bitcoin Cash on place 6. NBA 2K’s VC would be placed on position 13 with a market cap of 1.2 billion USD below Cardano and above Bitcoin SV.

Nonetheless, with the market cap just being an indicator of how much an investor would pay for a purchase of the total supply at the current price, it does not represent how much money went into or out of a particular asset. For example, with just a 24-hour volume of 26.4 billion USD, the overall market cap of cryptocurrencies listed on CoinMarketCap fell from 395 billion USD to 330 billion USD on February 6, 2018, which is a market cap decline of 2.64 times the volume the coins were traded at. So, the question is how much does the market cap of a cryptocurrency increase, if it has a fixed circulating supply and a certain amount of money is invested in it?

According to an estimation by Thomas Lee, the overall cryptocurrency market cap increases by 25 billion, every time 1 billion USD goes into the crypto market.¹⁷ That estimation might have its origin in the bull market and honestly, I think 25 times as a figure is quite high but I generally agree that a billion invested in the crypto market leads to a multi-billion increase in market cap, due to thin orderbooks and a lack of liquidity for large buy orders as we have seen in 2017. Vice versa, a billion cashed out of the market leads to a multi-billion decrease in market cap, which we witnessed in 2018. Let’s go with a more conservative approach than Thomas Lee and say, that the cryptocurrency market cap increases by 5-10 billion for every billion invested in it. The following graphic shows the hypothetical market cap of the two in-game currencies under the consideration of a multi-billion dollar market cap increase for every billion invested in the asset:

Due to the fixed price of Ultimate Team points or the VC sold in the NBA 2K series, we know how much money was invested in these during the last couple of years. Take-Two had an estimated net revenue from selling virtual currencies in the NBA 2K series of around 1.2 billion USD in the last 6 years, with an estimated 470 million from fiscal year 2018 alone. However, they did all that with just 9 million copies sold of NBA 2K18 in fiscal year 2018. While this is certainly a high number for a sports game, think about the potential we are talking here.

Let’s say an application can create the same demand than the NBA 2K series for their virtual currency but has 90 million users instead of 9 million users. Then we are not talking about 470 million USD put into the token in one year but rather 4.7 billion USD. Connecting that to the fact that one billion USD invested leads to a multi-billion USD increase in market cap, shows us the potential of a very successful utility token. Let’s say it leads to 5 times the market cap, then we are looking at a 23.5 billion USD market cap for that 90 million user application, which is currently around 2x the market cap of Ethereum or XRP. Let’s say it leads to 10 times the market cap (47 billion USD) or Tom Lee’s suggested 25 times increase, then we are looking at a 117.5 billion USD market cap for the application, which is around 50 billion higher than Bitcoin’s current market cap and underlines the huge potential of highly demanded utility tokens.

While utility tokens are an innovative new financial asset, the cryptocurrency market has seen its majority of utility tokens stay without many use cases or users, resulting in heavy price declines of these tokens. On the contrary, the gaming sector has successfully integrated virtual currencies into video games. Especially the sports gaming sector has created a huge demand for their tokens by providing gamers with better players in exchange for purchasable in-game currencies. The NBA 2K series or EA’s Ultimate Team mode are perfect examples for this success with the generation of multiple billion USD in net revenue by selling their virtual currencies. If a cryptocurrency reaches a comparable or even higher demand than these games, it would certainly be placed among the top cryptocurrencies and could reach a market cap higher than Ethereum’s or XRP’s current market cap, with even a chance to surpass Bitcoin’s current market cap.